Wednesday, March 18, 2015

What's the Rush?
A 3/6 NYT editorial opposed any monetary tightening for now: “The Fed should hold off until wages are growing in tandem with inflation and productivity.” In a speech in India yesterday, IMF Chief Christine Lagarde warned of a repeat of high market volatility and capital outflows when the Fed hikes rates next time and asked India and other emerging market economies to be prepared for such an eventuality. Amir Sufi, an economics professor at the University of Chicago, was widely quoted yesterday saying that inflation doesn’t justify a Fed rate hike this year.

What’s the rush? Well, the federal funds rate has been at zero since December 16, 2008. That’s over six years. One of these days, the Fed will need to lower interest rates to avert or moderate the next recession. To be prepared for that eventuality, the Fed should start raising interest rates.

We think that’s the main reason why the Fed will do so at the June 16-17 meeting of the FOMC. However, it may still be “one-and-done” for Fed rate hikes this year since there is no rush to raise interest rates rapidly. We are expecting a “patient pace” of rate increases. Stocks and bonds should respond positively to that. The dollar might stop soaring as well.
(Based on an excerpt from YRI Morning Briefing)

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